Now that we’ve looked at some of the grey areas in reporting expenses, let’s focus on how to calculate some of those expenses when using the home as your office.
To calculate business-use-of-home expenses, you must first calculate how much space your home office occupies in your home’s overall square footage.
Example 1: Office is used strictly for business
Let’s say your office is 100 square feet (10 ft x 10 ft) and your home is 2000 square feet. Your office makes up 5% of your total home expenses.
You add up your maintenance costs (such as heat, electricity, cleaning materials, etc.), insurance, mortgage interest and property tax for the year and your total expenses are $20,000.
Your home office expenses are 5% x 20,000 = $1,000.
We’ve got a handy home office expense worksheet that will do the calculations for you.
But what if your home office is actually your kitchen, which you use for both business and personal activities?
Example 2: Office is used for both business and personal activities
In this example, you need to calculate how many hours in a week you use your workspace for business purposes. Then you divide this number by the maximum 168 hours in a week and multiply by the business portion of your total home expenses.
You use your kitchen (aka office) 8 hours x 5 days a week, for a total of 40 hours out of 168 (24 x 7). This equals 24%. Now lets say your kitchen is 300 sq ft(20ft x 15ft), which is 15% of your home.
Multiply your home office expenses ($20,000) by 15%, for kitchen expense of $3,000.
Your business-use-of-home expenses are 24% x 3,000 = $720.
Doesn’t sound too tricky, right? What’s also important is properly logging your work hours so that when tax time comes, you aren’t guessing and left feeling unsure. It is safe to assume you are logging work hours for your company anyway, so as long as you keep up to date on these entries and use these numbers for your taxes, everything should be fine.
If you are feeling uneasy and would like some extra advice, we’re always here to help sort through any issues that arise. More and more people are working from home these days, so don’t worry – you aren’t alone! Reach out to us with any calculation or expense-related questions.